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IS THERE A FUTURE FOR REGIONAL BANKS AND REGIONAL EXCHANGES? The Strategies of Selected Austrian Finance Institutions Four Papers: D.T. Llewellyn, “The future for small & regional banks in Europe” R. Ortner, “What future for regional banks?” H. Stepic, “The Strategy of RZB in Central and Eastern Europe” St. K. Zapotocky, “The challenges and chances of regional exchanges” Société Universitaire Européenne de Recherches Financières Vienna 2002 CIP Is there a future for regional banks and regional exchanges? – The strategies of selected Austrian Finance Institutions by D.T. Llewellyn, R. Ortner, H. Stepic, St.K. Zapotocky Vienna: SUERF (SUERF Studies: 19) ISBN 3-902109-11-4 Keywords: small banks, bank strategy, regional banks, banking in Central Europe JEL-Classification Number: F3, G2 © 2002 SUERF, Vienna Copyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyright holder(s); the same applied to whole or partial adaptions. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other actions for this purpose. Contents Editorial 5 THE FUTURE FOR SMALL & REGIONAL BANKS IN EUROPE 7 Introduction & Context 9 1. The strategy matrix 9 1.1 Economies of scale 10 2. Consolidation in global banking 13 2.1 Reservations on scale 13 2.2 Overall assessment 15 3. Contract banking 17 4. Future for small financial firms 21 5. New organisational structures 23 6. Economies of scale again 25 7. The importance of strategy 27 8. Overall assessment 29 References 31 WHAT FUTURE FOR REGIONAL BANKS? 35 1. Klondike in Europe? 37 2. Enlargement of the EU 39 3. No pan-European retail bank so far 41 4. Erste Bank’s strategic focus 43 5. Customers as the basis for economic success 45 6. The right moment 49 7. Uniform market for customers and employees 51 4 THE STRATEGY OF RZB IN CENTRAL AND EASTERN EUROPE 55 1. The development of the banking industry in CEE 57 2. The strategy of RZB in CEE 59 3. Opportunities of the EU-enlargement 63 4. Concluding remarks 67 THE CHALLENGES AND CHANCES OF REGIONAL EXCHANGES 71 1. Introduction 73 2. International developments in the stock market environment 75 2.1 Benchmarking capital markets 75 2.2 Capital market trends in the EU 79 3. Developments on the Austrian Capital Market 83 3.1 Starting situation 83 3.2 Six Hypotheses on the positioning of Wiener Börse as a regional exchange in the Austrian economic region in a single European market 92 SUERF 97 SUERF STUDIES 99 5 Is there a Future for Regional Banks and Regional Exchanges? The Strategies of Selected Austrian Finance Institutions Editorial It has been argued that the combination of technological advance, the European Single Market, the advent of EMU and, more generally, the reality of a global financial community, is undermining the competitive position of small, regional financial organisations, be they banks, stock exchanges or other financial entities. This line of argument leads to the conclusion that there is no viable business future for the small. This SUERF Study offers points of view to the contrary, both from the academic and “practitioners” angle. Professor David Llewellyn contributes the academic view, strongly arguing that size per se is not the issue but rather that efficient, well focused small and medium-sized financial institutions remain viable. Representatives of three regional financial institutions in Austria were asked to discuss elements of their business strategy to substantiate their belief in the viability of their institution’s future. The contribution by Reinhard Ortner (Erste Bank) is based on a talk he gave on the occasion of the 22nd SUERF Colloquium in Vienna in 2000, and that of Helmut Stepic (Raiffeisen Zentralbank) on a speech at the Alpbacher Banking Seminar in 2001. The consolidation and concentration process has, of course, also engulfed stock exchanges and many of the small ones have already been pronounced terminally ill. Stefan Zapotocky (Wiener Börse AG) is firm in his view that regional exchanges will have a viable future catering for regional financing needs. His contribution is based on a presentation at the SUERF Salzburg Seminar of 2002, which dealt with the future of regional exchanges. Eduard Hochreiter SUERF Secretary General 7 THE FUTURE FOR SMALL & REGIONAL BANKS IN EUROPE David T. Llewellyn Professor of Money & Banking Loughborough University, Loughborough, Leicestershire, LE11 3TU, UK Tel: (44) (0)1509 222700 Fax: (44) (0)1509 223910 email: [email protected] 9 Introduction & Context A distinguishing feature of banking in many European countries is that there is a large number of comparatively small, and often locally or regionally based banks. In some markets such banks compete with very large, global financial conglomerates. A central strategic question is addressed in this paper: is there a viable business future for the comparatively small and regionally-based financial services institution? A key issue is whether, in a world where a major consolidation process is unfolding in the financial sector, there is a future for comparatively small (perhaps regional or even local) financial institutions. Our conclusion is that size per se is not the key issue and that, providing it is efficient, there is a clear and viable future for the comparatively small, regional and focused financial firm. The following two studies describe the chosen strategy of two successful regionally-based Austrian banks and how they have sought to exploit their competitive advantages in new markets. Before that, this chapter offers a more general overview of the future of regionally-based banks which compete with national and global banks and in a world where economies of scale seem to be increasing. The fourth and final study addresses the future prospects of the small regional stock exchange. 1. The strategy matrix Two dominant trends in bank strategy (size and diversification) can be represented in a strategy matrix as described in figure 1. The general trend is for financial firms to seek to move from left to right along the horizontal axis of the matrix (i.e. to become larger), and from top to bottom (i.e. to become more diversified). In other words, the global trend is towards the bottom right hand segment of the matrix. 10 The strategy matrix While this has become something of a conventional wisdom, the strategy does not go without challenge in either dimension: scale and diversification. It is not self-evident that economies of scale are dominant in banks to the extent that only very large banks can be competitive, or that being widely diversified (geographically or product mix) is the only route to success. There is scope for small, regionally-based and focused financial institutions to compete alongside large diversified national and global institutions in the pluralistic financial systems that are likely to emerge. Two examples for strategies of small regional banks are presented in the two papers (by Stepic and Ortner) that follow. 1.1 Economies of scale Three key strategic issues for banks and other financial firms relate to: (1) whether there are economies of scale in banks, (2) if so, the origin of such economies, and (3) how any such economies of scale are to be secured through alternative organisational structures. An enormous academic empirical literature has attempted to identify and measure economies and diseconomies of scale in banks. For a review of the theoretical and empirical literature on scale economies in banking see Goddard, et al. (2001) and Llewellyn (1999). The traditional empirical literature does not yield unambiguous results and tends to conclude that there are only limited economies of scale in banks. Although there are differences between the studies, almost all suggest there are no significant scale efficiencies to be gained, and possibly some slight scale efficiency losses to be suffered, from mergers and acquisitions involving large banks. As put by Bisignano (1998) in the context of a wave of bank mergers: ‘with reference to banks a puzzle exists, since there is little empirical analysis which confirms the existence of significant economies of scale in banking ..... the merger-acquisition wave in banking is difficult to understand.’ Overall, except with comparatively small banks, there seems to be little evidence that large banks have lower average costs than smaller banks, and economies of scale seem to be exhausted at comparatively low levels. There is some evidence that increasing size beyond a certain point has the effect of raising unit costs. The overwhelming conclusion from the empirical evidence is that the major determinant of a bank’s cost level is not size per se but its own internal efficiency (X-efficiency). In other words, the variation in costs between banks of similar size is greater than that between banks of different size. Overall, there is no firm evidence that size per se is a necessary The strategy matrix 11 ingredient of success. While many researchers find significant potential economies of scale, it remains the case that most large banks do not fully exploit this. Many research studies of scale efficiencies in the late 1980s and early 1990s were based on US data from the 1980s. More recent literature is identifying greater economies of scale than in the past. This later research suggests there may be more substantial scale economies. It would appear that the potential for scale economies increased in the 1990s compared with earlier periods. This may in part be associated with the impact of information and processing technology in two respects: modern technology is large scale, and expensive in nature and hence is feasible and economic only for large banks, and processing technology is raising the economies of scale in many bank processes.

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